Brash fails quiz in his 'shoddy' report

BY ROD ORAM

OPINION: ANSWERING THE $64,000 Question is the apt title of the Brash 2025 taskforce's first report.

The catchphrase entered popular culture in the 1950s, thanks to a US television game show sponsored by Revlon, the cosmetics company.

It's a perfect parallel. Contestants answered successively harder questions, with each right answer paying double the prize of the previous. At any point, contestants could take the money – or leave it and try doubling up.

That's how we've run the economic debate in New Zealand for 25 years.

Many people have taken the easy money, rather than try the hard stuff, and a few, like former Reserve Bank governor and National party leader Don Brash, keep urging us to risk all by doubling up on reforms and other simplistic options.

Too few people want to ask and act on the really big, hard questions: what are our best opportunities in the world economy? How do we make money from them?

The title's doubly apt. Once contestants got to the $8000 question, they were locked in the "Revlon Isolation Booth". All they could hear was the disembodied voice of the game show host as they sweated their way to the ultimate goal of answering the $64,000 question.

And so it is with the taskforce report. We're told taskforce members unanimously supported its 48 recommendations. But the only voice we hear is Brash. He delivered the same themes, conclusions and language in his July 30 speech to AUT, three weeks before the taskforce members were appointed.

The report is also pure Brash in its rhetorical devices, borrowing five from his 2004 Orewa speech on nationhood and his 2005 Orewa speech on welfare:

Sweeping generalisations: "As we've become relatively poorer, New Zealand extended the welfare system in ways that allow an increasingly large proportion of the working population to opt out of working, fully financed and supported by the state," the report says.

In fact, the percentage of the adult population in work rose from 56.5% in the first quarter of 1991 at the height of economic reforms to a record 66% in the fourth quarter of last year.

Pinpoint focus: The report is about only minimalist government. It does not believe good government can help business and society to understand and equip themselves for the long-term strategic challenges and opportunities.

Demeaning analysis: The report catalogues our failures, but makes no attempt to analyse our successes. Our consumption of alcohol and McDonalds are among its measures of progress. Likewise, Brash gave only one-and-a-half positive sentences about Maori in his 10-page nationhood speech at Orewa.

Ideology over reality: The report dismisses as irrelevant, for example, any increase in government Research and Development spending or move to compulsory superannuation.

Yet, Australia credits both as key factors in its strong growth and its government recently increased its R and D spending by 25%.

Likewise, the report dismisses any sectoral approach by government to economic development. But three countries the report admires for their rapid growth – Singapore, South Korea and Slovakia – are masters of the technique.

Devoid of context: The report has nothing to say about how dramatically economies, business models and policy tools have changed in other countries in the 25 years since Brash and his fellow reformers locked down their thinking here.

Likewise, it makes no attempt to analyse the strategies of Australia's businesses and government. Yet, we need to know what we're chasing. Australia plans to be in the top five of the OECD by 2025.

As a result, the report's quality of analysis is appallingly low.

It could be a clever undergraduate's review of 1980s and 1990s economic literature. But it would get only a D because it is shallow and historic, rather than deep and current. This is particularly evident in the report's attempt to explain why we are so far behind Australia in GDP per capita terms. It considers 15 factors, ranging from isolation from markets and commodity exports, to regulation and cost of capital. On 14 it decides that the differences between the two countries are immaterial.

It does acknowledge a big gap on one – investment and physical capital stock. It points out that our investment per worker in plant, equipment and technology is way behind. For every $100 invested per worker on average across OECD countries over the past 15 years, Australia spent $120 and we spent $70.

This is no new insight.

The IMF told us so seven years ago, this under investment explained almost all the per capita income gap and 75% of the labour productivity gap.

But the report makes no attempt to understand why that is, or what we might do about it, although other researchers, such as the IMF, OECD and the New Zealand Institute, have done so extensively.

Instead, the Brash report lamely says: "There is no suggestion that firms have not made rational choices, so the focus of analysis probably needs to be on opportunities."

Indeed it does. Many New Zealand businesses respond to lower taxes and increased profits by paying higher dividends and returning capital to shareholders. They believe it is too hard, or too risky, to invest the increased cashflow in R and D, more technology, or markets overseas. This is because wide-ranging reforms and sharp cuts in regulation and taxation during the 1980s and 1990s only made us a much more efficient economy.

But they made us no more sophisticated. Exports remain stuck at 30% of GDP and commodity-dominated.

The Brash remedy of more cuts in taxes and regulation, although welcome in themselves if kept modest, will be equally ineffective.

Macroeconomic policies only improve the playing field. They do nothing to change the game companies are playing on it.

The report does mention a few exemples of the new business models on which our future prosperity depends, companies such as Rakon, Icebreaker and Fisher & Paykel Healthcare. And it mentions others such as Navman that have tried, but failed.

But it shows no intellectual curiosity at all about why such companies grow so slowly and insecurely. It believes government has no role in helping such businesses, let alone telling them what to do.

Yet, the report immediately contradicts itself by saying the government should put pressure on Fonterra to cease being a co-op and include non-farmer investors, and strip Zespri of its export marketing monopoly.

The Brash report is even more negligent on skills and human capital, the factor that every government in the world sees as the single most important determinant of economic and societal success. It lavishes a mere 13.5 lines on the subject in its 147-page report.

Its conclusion? "It seems unlikely that deficiencies in this area can explain much about why our incomes lag so far behind those in Australia and elsewhere in the OECD."

So, it can't tell us what the human capital deficiencies are. But it can tell us to what to do about them – open up secondary education to the private sector and tertiary education to Australian universities.

This is typical of the shoddy analysis and doctrinaire recommendations of the entire report. All it can say is: we're not sure what the problems are or what we can do about them. But much lower taxes, government spending and regulation will do the trick.

It offers no evidence or modelling for its lazy conclusion. Instead it devotes, for example, more than 30 pages to regulation, 100 times the space it devotes to human capital and skills.

The taskforce is devoid of new insight or useful new recommendations because its chairman's skills are so limited. Brash is a very macro economist and, worse, one who is often highly theoretical.

Nonetheless, he and his political colleagues have done us a great service. They have shown they have nothing useful to say to people trying to progress New Zealand. Instead, they have locked themselves in the Isolation Booth and thrown away the key.

- © Fairfax NZ News