My challenge to David Cunliffe

The Labour Party has announced a return to “industrial policy”. If elected, they will decide which businesses and sectors of the economy will deliver the highest returns and promote them in various ways – most obviously, by subsidising them with taxpayers’ money. 

This policy effectively replaces the decisions of private investors with the decisions of Labour Party politicians. It would be a foolish policy if Labour Party politicians were not better investors than the private investors they will replace.

So, before asking people to vote for the policy, shouldn’t David Cunliffe prove that he and his colleagues really are better investors than those who do it professionally?

He could do this easily. Mr Cunliffe could set up a small investment fund – $5,000 would suffice to get started – and trade it in the months before the election. Since he claims to know better than private investors which businesses will give the best returns, his fund should massively outperform the NZX 50 and other stock market indices.

Mr Cunliffe will surely leap at the opportunity to establish his credentials as an economic planner. If he won’t take the opportunity, then we must conclude that he is only pretending to know which investments are best.

Mr Cunliffe talks a good game when it comes to investing. And he plans to put your money where his mouth is. But before anyone goes along with him, they should insist that he puts his own money where his mouth is.

So I challenge Mr Cunliffe. Trade the stock market in the months before the election. Publish your trades as you make them and explain how you arrived at your supposed knowledge of which investments are best. By the election we will be able to see if you really do know what you claim to.  

If you won’t accept the challenge, then withdraw your proposal to use taxpayers’ money to invest in the businesses that take your fancy.

Labour and Greens serving business interests

David Cunliffe has decided to direct great wads of taxpayers’ money to the forestry industry. According to the Otago Daily Times, when “asked about the response from the industry to the policies, Mr Cunliffe said it had been ‘bloody good’, but that was not surprising, as the party had consulted widely with industry in putting the package together”.

What an astonishingly stupid question. Of course those who are about to be in receipt of taxpayers’ money think the policy is a bloody good idea. The questioner should have asked people in other industries, who will now face an unfair competition for resources, if they think it is a bloody good policy. Or he might have asked us taxpayers.

The Greens pulled the same trick last week when they boasted on Facebook that a solar panel producer had spoken favourably of the party's solar subsidy policy. Could politicians cosying up to business become the new norm under Labour and The Greens?

The harm done by industrial policies of the kind Mr Cunliffe and The Greens promote cannot be observed in the fortunes of the firms favoured by the government. For example, the Detroit car manufacturers bailed out by Obama may now be thriving. But that doesn’t show the policy worked. The cost of the policy is the opportunities for other productive activities that have been forgone because of the forcible transfer of resources to Obama’s favoured firms.

Alas, those lost opportunities are invisible. Whereas the joy of those being offered a meal at the tax-funded trough is all too obvious.

Cunliffe's proposed crony capitalism

On Friday David Cunliffe declared that in government Labour would plan the economy. “Government should back positive Kiwi businesses, not leave it to the wolves of international trade … That also means attracting industry to New Zealand regions that need it most. Industry policy has become a dirty word. It isn’t. Regional development has also fallen by the wayside. Labour will bring it back. We want good jobs in every region of New Zealand.”

The obvious folly in this policy is the wilful misallocation of resources. The regions that most “need” government help in attracting investment are those that, for whatever reason, are least attractive to investors.

Investors do not act from feelings of regional malice. If they prefer region A to region B, that is because they think the return on the investment will be higher if made in A than in B. To make them instead invest in B, Mr Cunliffe will have to give them enough taxpayers’ money to compensate them for the loss this entails.

The taxpayers' money spent on this regional subsidy is then no longer available for other investments or to consume the output of other firms. So, to get the regional distribution of investment that suits his tastes, Mr Cunliffe will reduce aggregate economic output.

The less obvious problem with the policy is the explosion of "rent-seeking" or crony-capitalism that this policy will cause.

In a free market, firms must attract capital from willing investors and make profits from sales to willing customers. In Mr Cunliffe’s planned economy they will be able to relieve themselves of this burden provided they can convince government bureaucrats that they will promote regional development or are a “smart green business” or possess some other virtue that willing customers and investors have allegedly overlooked. Then the crony firms can extract their profits from helpless taxpayers.  

Corporate head offices will start relocating to Wellington. And Courtney Place restaurants will boom on the lobbyists’ expense accounts. 

Cunliffe peddles foreign ownership myths

Many on the political Left complain about foreign ownership of New Zealand businesses on the ground that the profits are “sent overseas”. This is a foolish misunderstand of what happens when foreigners buy New Zealand businesses. But not too foolish to be repeated by David Cunliffe in his speech today about Labour’s economic policy: “right now [foreign direct investment] is poorly managed, and it’s Kiwis who are losing out. Overseas investors are buying up land, farms and good companies, then sending the jobs and profits overseas”.
The value of a business depends on its expected future profits. The seller of a company is in effect swapping the profits she would have got over future years for a lump sum she gets today. The lump sum (the purchase price) represents the present value of the future profits.
When a foreigner buys a New Zealand business, all the expected future profits of the business come into the country in the purchase price. When the actual future profits then go out to the new owner overseas, there is no net loss.
In fact, the transaction must involve a net gain for New Zealand. This is because, if the purchase price were exactly equal to the present value of the expected future profits, the Kiwi owner would have gained nothing from the transaction and would not have sold. The Kiwi seller must have valued the purchase price higher than the future earnings. So the transaction creates a net gain to New Zealand.
If Mr Cunliffe does not understand this, then he learnt little from his days at the Boston Consulting Group. If he does understand it but still peddles the popular myth of profits lost overseas, well, that is even worse.  

Cunliffe's Economic Confusion

David Cunliffe today gave a speech to the New Zealand Initiative, an economics think tank. The talk outlines the Labour Party’s economic policy. It displays so much economic confusion that it will take several posts to get through it all. Today I want to identify a fundamental conflict between Labour’s economic goal and its proposed monetary policy.

Mr Cunliffe begins his speech by saying that New Zealand businesses produce too much low value stuff. Labour wants to “support New Zealand business in the journey from volume to value”. He then claimed that “the biggest obstacle to our exporting businesses is the consistently over-valued and volatile exchange rate. Labour has long signalled it will review monetary policy to ensure our dollar is more fairly valued to help business and lower our external balance”.

A devalued dollar helps exporters sell more overseas by reducing the price foreigners pay for our goods. For example, if the NZ dollar fell from US$0.85 US$ 0.70, what an American pays for a NZ$1,000 widget would fall from US$850 to US$700. So Americans would buy more of those NZ made widgets. But, of course, the value of those widget sales would have fallen. The reduced exchange rate increases the volume of what we sell overseas by decreasing its value – the exact opposite of Mr Cunliffe’s goal.

Such confusion would be funny, if only there weren’t a chance, however small, that these people will get a chance to act on their ideas.

ACT leader Jamie Whyte supports Reserve Bank Governor

ACT Leader Jamie Whyte strongly supports the Reserve Bank Governor's decision to raise interest rates.
"All party leaders should be supporting the independence of the Reserve Bank Governor.  The statements from the leader of the Opposition are reckless and self serving.  The statements from the Greens and New Zealand First are dangerous," said Dr Whyte. 
"If Labour were to implement its present election promises, interest rates would have to rise further.  Every economically literate person in New Zealand knows that if the country wants to avoid damaging inflation then interest rates need to rise.
"I have spent the last ten years as a consultant working to correct the wreckage of the Global Financial Crisis.  Part of the reason for the crisis has been politicans refusing to back strong independent Reserve Banks.  Countries that have tried to impliment the policies of New Zealand First and the Greens have ended up in a mess - like Greece.
"ACT strongly supports an independent Reserve Bank.  We believe it would be helpful if the Minister of Finance Bill English came out strongly and not only supported the Bank's independence, but also said what we all know to be true - that this rise is needed.
"Having politicans fix interest rates is a road to economic chaos.  In election year it is important party leaders show some courage and tell the truth that the Reserve Bank is without doubt correct to raise interest rates, and more rises are inevitable.
"It is also worth pointing out that for every borrower there is a saver.  The decision to raise interest rates benefits even borrowers and exporters because no-one wins from runaway inflation."

Right Thinking - the word from Wellington Dec 20


As good as it gets?

Finance Minister Bill English released the Budget Policy Statement and the Half Year Economic and Fiscal Update this week confirming we are through the worst of the GFC.  Treasury forecast an average growth rate of 2.6% over the next five years.  They characterise this as relatively strong.  However, it is significantly lower than forecast growth in a protein hungry Asia which accounts for about 44% of our trade and slightly less than Australia whose growth may, or may not, stay on forecast.  Of course some of New Zealand’s growth results from the re-build in Canterbury.  

Interestingly, Treasury note the strong increase in net permanent migration to New Zealand (17,500 in the year to October), half of which is from Australia and two-thirds of that, returning New Zealanders.  This may be a good reason to stop advocating for an extension of Australian welfare entitlements to New Zealanders as all our Prime Ministers ritually do.  

The size of government is set to grow

Mr English confirmed that Budget 2014 will achieve a forecast surplus $86million which is paper thin compared to a NZ$72 billion spend, but it’s a surplus nonetheless.  Revenue is rolling in while expenditure is constrained.  Net core Crown debt peaks at 26.6% of GDP and drops to a 22.3% by 2017/18 largely due to the improvements in the cash position.  Revenue in 2013 was NZ$61.1 billion and is set to hit NZ$84.9 billion in 2017/18.  Core Crown expenses in the same period start at NZ$70.3 billion and hits NZ$79billion in 2017/18. Treasury say we can expect a surplus of NZ$5.6 billion at the end of the forecast period assuming ongoing spending restraint.

Houston we have a revenue problem

Treasury say that tax revenue is due to grow by about 5.8% p.a. over the forecast period.  They correctly identify the risk of a change in emphasis away from expenditure restraint.  Nominal increases in core Crown expenses are driven by social programmes: social welfare benefits (the biggest of which is super and it accounts for most of the increased spend), health and education.  From an ACT perspective an expansion of poor quality social spending could start under either a National led government in its last term or an incoming Labour-led government in 2017.

Election 2014 – giving some back or more tax and spend

With more than a third more revenue forecast in 2017/18 than in 2012 the big question for election year is whose narrative wins.  The conventional wisdom is that an improving economy helps the incumbent Government.  This is likely true, however improving finances will also lead to political demands for more spending.  

Already the child poverty ‘industry’ is in high gear essentially advocating more welfare and trying to make their issue and election issue.  Labour will probably run on the gap between rich and poor, (inequality) and echo their UK counterparts.  This they will do, all the while ignoring the drivers of upward social mobility, which are not about more welfare programmes, but about better educational achievement.

National’s narrative is steady-as-she-goes and is about good economic stewardship.  Will National make even the gentlest philosophical argument about taking less in revenue from taxpayers when it conflicts with the repayment of debt line?  We know they will not undertake to address the future cost of superannuation.  They have done some reform in welfare and education and nothing particularly substantial in health, although Tony Ryall will almost singlehandedly ensure that health is not an election issue.

Making the case for slimming the State in 2014

The best way to keep on pressure to restrain spending is to focus on public debt repayment and limiting new spending which makes politicians and bureaucrats consider value for money and the quality existing programmes.  But spending self-control won’t be enough.  History is against a record of on-going restraint, politicians and bureaucrats are simply not incentivised for it.  Touchingly, Treasury have confidence that today’s politicians are keen to prepare the books for the GFC#2 sometime in the future.   Returning some revenue to the New Zealanders who generate that wealth in the first place is the only sure-fire way to slim government over the longer run and generate a higher rate of economic growth. 

Traditionally, making the early case for tax cuts falls to ACT.  In 2002 we campaigned on tax cuts.  By 2005 both Dr Brash and Dr Cullen were too.  In 2008 National campaigned on tax cuts, implemented the first tranche and ditched the rest of the programme because of the GFC. 

As New Zealand moves into the post GFC economy, the real world arguments about whether the New Zealand State should aspire to do so much for so many citizens, who could probably make better arrangements for themselves with more of their own money, will and should return.

The Wrap

RT will return on 10 January 2014.  We wish everyone a Happy and Safe Christmas and a prosperous New Year.

Right Thinking - the word from Wellington Dec 13


Avalanche of bad news and the adjournment

As the American writer and wit Mark Twain observed, no man’s life, liberty or property is safe while Congress is in session.  This week, the Parliament wrapped up business for the year with most MPs returning to their electorates and regions.

December is also traditionally the month where Ministers release bad news.  Ministers bearing bad news are like the wildebeest of the Serengeti in migration - there is safety in numbers when pressing towards Christmas.    This is the time when the public are too pre-occupied to be further outraged.  And most journalists are filled with the stories of year and working up their end of year retrospective pieces.   An added advantage this year has been the death of the iconic Nelson Mandela and the speculation as to whether Mr Minto was more deserving of a place in the Prime Minister’s party to South Africa.  

The major event in the Parliamentary calendar (aside from the Press Gallery party) is the adjournment.  It is generally a light-hearted debate where MPs do ritual battle and all in sundry are generously thanked.  You can see John Banks’ stout defence of both himself and the Partnership Schools in Whangaruru and Whangarei, both of which are being targeted by the nasty PPTA.

Yet another failed IT project

In the pre-Christmas avalanche of bad news was a gem of a story about the New Zealand digital archives project being... well... shelved.  The hapless Minister of Internal Affairs, Chris Tremain admitted that he had put the project on hold in February and that, thus far after a spend of $7.4 million, it had not been money well spent.  While Labour’s Grant Robinson appeared in the story, what was much more interesting was that it took him 10 months to latch on to it.  Any government information technology project should be worth an official information request on a monthly basis from any decent Opposition politician.

 A chorus of woe and the ComCom

Finance Minister Bill English announced a kicking-of-the-tires review of the Commerce Commission in the wake of the final determination of the wholesale price of copper over Chorus’ copper wires.  As yet the terms of reference for this review and who will actually be doing it is not clear.

The Broadband decision is not the only cause for complaint; another is the effect ComCom speculation (in a press release) about regulating the pay-tv market.  This speculation had an immediate impact shareholder value in SkyTV.  A further compliant is the effect of regulatory decisions on electricity line companies, particularly those with publicly listed shares and are therefore subject to market disciplines.   The general argument goes that the ComCom is not concerned enough about shareholder value and investor confidence in the regulated industries.

This latest announcement is not the only piece of work underway in the regulatory space.  Mr English’s review of the ComCom could compliment a wider piece of work commissioned by the Minister of Finance and the then Minister of Regulatory Reform, John Banks from the Productivity Commission on New Zealand’s regulatory systems.

The argument that partially privatised government power companies still face political risk isn’t new – the Opposition parties have been in overdrive to generate this very uncertainty all year.  Likewise, argument about the risk to fully privatised ex-state industries that attract further meddling from Ministers.   Recently Dr Bryce Wilkinson has helpfully outlined the sorry tale of government meddling in the telecommunications industry for the NZ Initiative.

It is not immediately clear whether Mr English’s kicking-of-the-ComCom-tires will add to, or subtract from the perception of meddling politicians and bureaucrats.  

Momentum seeps out of referendum campaign

News that the turnout in the referendum against partial asset sales has reached just over 40 per cent will be disheartening for Labour and the Greens.  Turnout figures and the preliminaries show a very minor uptick in the turnout in the last day but the momentum has clearly gone out of the campaign. They won’t hit a 50 per cent (or more) response rate. This citizens initiated referendum was always more about building momentum and political infrastructure than it was about the issue.

RT knew the turnout would be low when we saw the first Electoral Commission advertisements.  Being lectured at by an orange stickman doesn’t build interest in the issue nor confidence that it matters.

Of interest will be how the media writes up the result. With almost one third of respondents approving the sale and just over two-thirds against this is a Labour and Greens fail.  In fact they got less votes against than National won in favour in the 2011 general election.  The story should be about how the campaign lost steam despite large injections of taxpayer money and paid party activists.  After all that is what the campaigning Labour/Greens MPs are.  The best explanation of a turnout of less than half of all eligible voters is that most New Zealanders had worked out that it was a stunt – it simply didn’t matter to them.

It’s also doubtful whether either Labour or the Greens built much campaign infrastructure from the exercise.  Many a leftwing activist will end the year tired and somewhat flat.  In politics as in life, one should not mistake activity for productivity.

Right Thinking - the word from Wellington Nov 15


Partnership Schools are on the way

Tomorrow (details here) is the opportunity for Aucklanders to hear Nick Hyde who is the CEO of the Vanguard Military School one of the five new Partnership Schools championed by ACT.  Nick and his family have a proven track record of leadership in the education sector with running the Advanced Training Centre’s Military Prep School.   You can read about the other successful Partnership Schools | Kura Hourua announced by John Banks and Hekia Parata here.

Getting the public policy right around expanding school choice and empowering the parents of some of our most vulnerable students is only half the battle.  ACT’s own Catherine Isaac played a major role in making sure that New Zealand got world leading policy.   Best evidence also shows that great schools require great school leaders.  Come along a join us at the Auckland North Regional Forum tomorrow if you can– you will be inspired.


Goosing CCCP polling; Labour tanks the economy grows

For the past fortnight the Nats have been talking up Colin Craig’s Conservative Party (CCCP) in an attempt to goose his polling numbers with the journalists joining in. For the journalists, Craig has all the potential of being New Zealand’s version of Australia’s Clive Palmer.  That makes for great copy if your beat is politics.  It also sets up a nice pattern.  As Mr Craig makes up policy on the trot; is it a bottomline?  If so, how does Mr Key respond?   

The real take-out of the polls has been missed. Labour’s leadership change hasn’t worked.   What is also becoming clear is that while Mr Cunliffe is bright, he is also lazy.   He isn’t on top of his material in Parliament.  It also comes across in his glibness; what sounds profound on first hearing does stack up on closer inspection.   The more Labour MPs profess to be energized, fired up and good to go the more unhappy many look.  Rodney Hide has a thesis that Labour is still more pre-occupied with itself than the country, despite the best efforts of Mr Cunliffe.

Out of the GFC shadow

Poll numbers are not the only numbers that matter in politics.  Those around economic fundamentals also matter.  The post GFC economy is emerging.   Economic growth is up to 2.7 per cent to the year to June and likely to hit over 3.5 per cent in election year – the ANZ Bank says they see a potential for economic growth at over 4 per cent.  Unemployment is down, inflation, current account deficit, and 90 day Bank Bills interest rates are all up consistent with real economic growth.  With a growing sense of economic security those voters that Mr Cunliffe needs to win are not the stay-at-homes but those that swing between Labour and the Nats; they are less likely to shift away from Mr Key in an election about economic credibility.


Fast followers now out on a limb?

This week Australian Prime Minister Tony Abbott introduced his Bill to repeal the carbon tax with Federal Treasurer Joe Hockey introducing an accompanying measure to repeal the mining tax.  While the Bills have to get through the Australian Senate, these taxes are dead. 

It places New Zealand in a tricky position with our Emissions Trading Scheme (ETS).  The purpose of our ETS was to ensure that we were seen to do our bit to reduce carbon emissions even if in fact the ETS didn’t actually reduce emissions.  Officials freely conceded that any drop in New Zealand’s emissions would make no difference to the climate anyway.  No, what mattered was we were seen to be doing our bit.  New Zealand was to be a fast follower not a world leader.  With the moves in Australia, New Zealand is not only a world leader with our ETS we are out on a limb.   Only Europe has an ETS and it is nowhere near as broad or as ambitious as our one.  What is more there won’t be ETS or a carbon tax in the US or Canada any time soon.  Surely being a fast follower now means dumping the ETS?


The Wrap

Emotional intelligence bypass of the week

This one goes to Russel Norman Co-Leader (and real leader) of the Greens and his contribution to Parliament on Typhoon Haiyan.  The purpose of the motion was to express New Zealand’s sympathy to the Government and peoples of the Philippines.  Instead, Dr Norman made it about domestic politics and about the Greens by reading a long highly emotional statement from a Philippines delegate at a global warming conference in Warsaw.   Most in the Parliament thought it crass.  You can see John Banks statement on the Typhoon here and you can make a donation to the Red Cross here.


Standing your ground award of the week

This one goes to ACT’s own Gareth Veale who has an unshakable confidence in his city of Christchurch and his Party.  ACT is a great campaigning party; we will be taking our message to the people of Christchurch East in the by election and to the wider city.


Upcoming Events

  • Auckland North Regional Forum, Takapuna Yacht Club, 39 The Strand, Takapuna, Saturday, November 16, 1.30pm - 4pm, Cost: $10.  Hosted by Beth Houlbrooke.  Speakers include Dr Jamie Whyte, Nick Hyde, and Professor Robert MacCulloch.

    To RSVP, you may register online here. Alternatively, you may contact  and direct credit your fees into the 'ACT NZ Auckland North Region' Bank Account 01-0121-0120885-00, putting your name in the particulars.

  • Canterbury Regional Forum, Saturday 23 November, 2.30 - 4.30pm Cotswold Hotel, Papanui Rd, Christchurch.

Minister Can No Longer Ignore Calls For An Inquiry Into Zespri

Primary industries Minister Nathan Guy cannot continue to ignore the damning claims of bullying, secrecy and unacceptable behaviour from concerned growers who are forced by the Government to supply their produce to monopoly exporter Zespri, ACT New Zealand Associate Primary industries Spokesman Robin Grieve said today.

“ACT has been calling on the Government to initiate an independent inquiry into Zespri’s activities after it was convicted of smuggling in China.   ACT now wants the inquiry broadened to look into concerns expressed by growers about the lack of transparency and intimidation by Zespri,” Mr Grieve said.

“A One News story over the weekend revealed the growing discontent among growers concerned with Zespri’s behaviour.   A number of growers were too afraid to appear on camera but told One News they are so appalled with Zespri’s conduct they would no longer deal with Zespri if they had the choice.

 “Zespri Board candidate, Tom Wilson, confirmed their claims saying people are ‘reluctant to stand up and voice their genuine concerns’ as the ‘Zespri PR network can destroy people’.  He says Zespri’s culture is arrogant, self-serving and needs to change.  

“ACT opposes monopolies - especially government mandated ones - because they generally become bloated, inefficient, and lazy.  ACT believes it is Zespri’s monopoly status and lack of proper oversight that has caused the current problems.   They are a monopoly out of control.

"It’s time for the Minister to listen and take action by launching an independent inquiry. 

“The inquiry currently being undertaken by New Zealand Kiwifruit Growers Incorporated is not independent and therefore the validity of any findings is compromised. 

 “Growers need an assurance that they are doing business with a reputable company.  At the moment there is no way they can find out.  Growers who question Zespri appear to be stonewalled and faced with intimidation if they speak out.

“The Government is responsible for how the kiwifruit industry is set up.   It is the Government’s responsibility to get to the bottom of this issue,” Mr Grieve said.