Dennis Wesselbaum: What are the Government’s policies actually worth?


The song “For What it’s Worth” by Buffalo Springfield starts: “There’s something happening here, what it is ain’t exactly clear … I think it’s time we stop … Everybody look what’s going down.”

This song reminded me of the economic policymaking under the Ardern governments: It is not clear what is happening and it is time to stop and look what is going on.

Take, for example, the increase in benefits recently announced and the arguments put forward by the Government. For those who have studied the effects of benefit changes, this policy will not necessarily make people better off.

There is research showing that increasing unemployment benefits reduces welfare (think wellbeing, if it is more politically correct) by leading to higher wages, which creates higher unemployment. Further, research has shown that increasing benefits reduces GDP and investment.

But, under the Ardern governments it apparently no longer matters whether a policy will lead to desired, let alone good, outcomes. After all, the Prime Minister as well as the Finance Minister both recently referred to economic policies as being primarily a “moral” issue, when talking about the increase in benefits. Why care about the actual effects, if the policy “feels” good?

“Know the outcomes that you want from those investments, right? So if you want to have a stimulatory effect, there’s no point putting it into projects that are going to deliver in 10 years’ time.” So the Prime Minister refers to the policies in the budget.

This is wrong on so many levels besides being incredibly myopic. Public investment spending has a larger effect (we call it the “fiscal multiplier”) in the long-run compared to the short-run.

However, the effect in the short run is positive, i.e. it increases income and creates jobs. This multiplier is particularly strong when interest rates are low.

The absence of informed economic decision making and “feel-good” mentality can be seen in a long list of recent policies and manifests itself in New Zealand’s poor (socio-) economic performance. Let us stop and look what’s going down.

The successful Covid-19 elimination strategy might – in the long-run – prove to be a Pyrrhic victory as we do not know what the effects of strict lockdown measures will be on, for example, health, mental health, and education.

The disastrous vaccination strategy has isolated New Zealand internationally with serious adverse consequences for businesses, for example, via uncertainty.

The housing policy is similarly bad. The Government has continuously tried to fix a supply-side problem via demand-side measures. This cannot and will not work.

Now, the Government erroneously puts some of the blame for the house price bubble on migrants and makes migration of skilled labour much harder. This will adversely affect labour supply and our productivity in most sectors.

In the labour market, the Fair Pay Agreements – besides being illegal and unpractical – will reduce productivity and increase wages and prices. Further, increasing firms’ costs – by increasing the minimum wage – in a deep recession that strongly affects the service sector is astounding, to say the least.

Fiscal policy these days seems more concerned with consolidation rather than supporting the economy. Voices become louder, suggesting a reversal of the fiscal stimulus and that how we should lower our debt-to-GDP ratio.

This is the exact opposite of what we should do and wastes an opportunity to grow back stronger.

Further, the Government actively interferes in monetary and financial stability policy making and threatens the independence and functioning of the Reserve Bank and sound monetary policy.

For what it’s worth, what we need in this country is less feel-good policies and more policies that increase our productivity.

We need robust, evidence-based, cost-benefit checked policies.

What we should do is heavily invest into infrastructure, education and training, and green start-ups.

Forget about the debt and start spending. Let the market work and do not create more frictions.

Drop the obsession with “wellbeing” and focus on the things that build the foundation for people to be happy, i.e. jobs and, therefore, GDP.

• Dr Dennis Wesselbaum is a senior lecturer with the Department of Economics at the University of Otago.

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