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« The Counting Heads Theory of Recessions | Main | Wal-Mart, the Coast Guard, and Hurricane Katrina »


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Good to find some Austrian-influenced economists with an interest in NZ.

In respect to low productivity and wages growth in NZ, everyone always notes the low degree of capital intensity and the tendency of employers to substitute cheap labour for capital. Few offer meaningful solutions. In the case of the present Treasury, they appear to be scratching their heads over it. They also appear to be scratching their heads over the connection to NZ's other macroeconomic imbalances, namely a massive CAD, high interest rates and a chronically overvalued currency.

Well, here are a few suggestions.

For a start, cut immigration. The present rate entails a level of household formation which is far in excess of the present savings pool to finance. Of the 30,000 odd immigrants arriving each year (net), let's say two thirds probably end up borrowing $400k to acquire their first home. That $8bn has to be funded offshore.

While in theory this might not directly crowd out other forms of more productive capital formation, in practice it seems to do so by creating a housing bubble and consumer spending boom, which in turn causes the inflation-targeting RBNZ to keep interest rates high. The resulting high and volatile carry trade currency deters further investment in export industry capital.

Second, cut the company tax rate to ten percent. It worked for Ireland, and might get some of those Aussie parent companies to allow a higher proportion of value added work to take place in NZ instead of relocating it all back to head office in Sydney.

Third, means test the pension with a combined asset and income test.

Fourth, compulsory tax-advantaged employer contribution of 3% into a privately owned superannuation plan, rising to 21% over seven years. This could also be accessed for a first home deposit or to fund a child's university education. Although this might deter labour demand slightly, evidence from Australia and Singapore shows the benefits tend to outweigh the costs. And the higher labour costs may perversely force employers to increase capital stock per employee (worked in Aussie).

Fifthly, impose a carbon tax and use it to reduce income taxes. Might as well get ahead of the curve on this one, and it's better than cap and trade (the hedge funds' wet dream).

The result economy would be much less consumerist, but would accelerate private wealth generation and captial formation. Speed of implementation would be limited, by the need to avoid a massive consumer-led recession, though I see no problem with 1% economic growth for a few years while inflation and the CAD are squeezed out.

It goes without saying that I admire sensible, conservative European countries with lots of private wealth, big CAD surpluses, good infrastructure and well-built houses, like Switzerland and Austria. Wealth is much more important than income, in my experience.

I wonder if any other NZers share this view.


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