Reading time
5 mins
October 18, 2017
Dr Ganesh Nana (Former Research Director)

Aiming for a high wage economy

Neo-liberal economics is dead – so let’s take this opportunity to set a platform for a high wage economy.

Tēnā koe.

In preparing for my kōrero, I came across the speech given by BERL founder Professor Bryan Philpott at BERL's 40th anniversary celebrations. It did cross my mind that I could just read out his speech and hope no one notices (or remembers) that it was 20 years old. Unfortunately, the Professor's total disregard and disdain for authority (something that I could only admire) comes through in his language. So repeating his speech here would more than likely land me in considerable hot water.

But, somewhat dishearteningly (but, perhaps, not surprising), much of his commentary remains just as valid today as it did some 20 years ago. His concern about the relative decline of NZ's tradable sector versus the relative rise of the non-tradable sector. And his comments on the consequences of, 

"The major, and in many respects unfortunate, economic experiment we've been involved with over the last decade or so."

And his conclusion that,

"Some aspects of this experiment can certainly be supported but much of it has contributed to the economic and social waste land we now inhabit."

And his, unfortunately forlorn, plea,

"I personally hope we're at the end of this particular experiment".

And, so, 20 years later, the experiment endures. And the economic and social waste land becomes ever entrenched as 'business as usual', and reflects the normality of life, for too many New Zealanders. And so, some 20 years hence, I feel obliged to add some contemporary thoughts as BERL's Chief Economist.

For starters, I remain sceptical and unconvinced of the magnitude of the gains from the experiment of the past 3 decades. And much of our work around the regions of Aotearoa provides the evidence – for example, in relation to the tradable export sector; the quality of the nation's infrastructure; education, training and labour market disconnects and inefficiencies; and disappointing levels of R&D expenditure. Exports are still struggling to breach the 30% of GDP threshold (let alone the 40% aspirational target), and there are many examples of the costs of deferred maintenance as investment in new transformational processes and technologies continue to be in the 'we can't afford it' basket.

Yes, there have been gains from the experiment, but my academic training tells me I need to weigh up those gains against the costs. I see (and measure) entrenched disparities in New Zealand, and growing disparities around the globe. These disparities sow the seeds for an unstable future – an instability the consequences of which we in NZ will not be able to avoid.

With all this in mind I have been confronted in past months with a recurring question: is 'neo-liberal economics' dying? I have found myself reluctant to respond – and have deferred to a standard, political, fence sitting response. But I now realise that avoiding this question isn't honest.

So, here is my honest answer – neo-liberal economics is not dying. Rather, it is already dead. In the sense of business decisions being driven by market price signals, the neo-liberal economic model is well and truly dead in the water – belly up, being towed by a life-raft known as taxpayer largesse.

I give 3 pieces of evidence

  • Firstly, the global finance and banking industry has been bailed out – and subsequently subsidised and supported by quantitative easing to the extent that it now knows it is has free licence to profit from decisions it knows carry few if any risks. This is not neo-liberal economics, this is taxpayers directly subsidising private enterprises enjoying monopoly profits. And, this is the same global industry that continues to berate governments for not abiding by financial controls; and demanding austerity budgets to restore market confidence in the fiscal prudence of authorities. The irony is not lost on me, although many still inexplicably seem to idolise the alleged virtues of austerity.
  • Secondly, the sacred neo-liberal tenet that was supposed to be the foundation platform for economic prosperity for future generations – that is, inflation-targeting via monetary policy – has been abandoned in the face of outright failure. Yes, we continue to target consumer price inflation. But that is a shallow imitation of the inflation targeting ethic of protecting the value of a money. Now, global monetary authorities conveniently turn a blind eye to the immensely disruptive and damaging havoc caused by uncontrolled asset price inflation. Of course, the cynic in me says I shouldn't be surprised – as that was the plan all along. A plan to enable asset owners to effortlessly inflate the book value of their assets through monetary largesse, while those without the privilege of owning assets languish in the face of the so-called market exercising its efficient allocation of resources. The irony when such asset owners argue against a capital gains tax does not escape me.
  • And thirdly, and perhaps of most relevance to the NZ economic mechanism, the neo-liberal model is an illusion increasingly reliant, not on the market, but on government (i.e. taxpayer) largesse to supplement workers' incomes. I refer, in particular, to Working for Families. Working for Families is essentially a subsidy to prop up businesses that adopt a low wage business model. A low wage model that can only be successfully pursued if the government can be relied on to continually top-up household earnings. For a low wage model without government topping-up household earnings leaves the demand side of the economy somewhat bereft of its crucial element – that is, demand. Consequently, as the welfare net broadens to now capture many that are indeed employed in the market economy, the inability of that market economy to deliver incomes for workers to be able to live (and to provide for their families) becomes ever more stark.

So, as the neo-liberal economy is dead, what next?

In the first instance, as the market economy is not delivering to all, we need an understanding that a pro-active government is a necessity not a burden.

And what options (or prescription) are there for such an economic mechanism?

My economic whare is built on 3 pou – 3 pillars – profitability, productivity, pay.

My primitive understanding of engineering suggests that a whare held up by 3 pillars is reliant on all 3 being equally strong. If just one of the three is weak, well common sense says there's not much of any roof or walls that can be held up by 2 pillars.

Productivity, profitability, pay.

But, you've heard it all before – New Zealand's problem – our wero – is our notoriously low productivity. It now takes the form of urban legend – NZ workers are hopeless/lazy/drug-addled/unskilled/illiterate/innumerate. And somehow this is neither our fault, nor is it a market failing?

And because their productivity is low, the profitability of our enterprises is marginal at best, so it's no surprise that there's not much left for their pay.

It seems incontrovertible. Low productivity leads to low profitability leads to low pay. And, if only we can lift productivity then all will be well. Yes, if only.

I suggest, that perhaps, just perhaps, the direction of causation implicit in this model, and in this thinking, is just way too simplistic.

From productivity, to profitability, to pay. Perhaps it might be an idea to lift our level of sophistication just a tad?

Perhaps, just perhaps, consider the option of starting the narrative with pay. So, rather than pay forever waiting at the end of queue behind productivity and profitability, why not consider pay being the catalyst to garner momentum?

Higher pay may lead to higher productivity and higher profitability, thereafter enabling further investment in skills training, R&D, adopting new techniques; sustainably lifting pay, productivity and profitability and making all 3 pou to our whare ever stronger.

The crux of this argument is to recognise that it is not a one-way causation. It's all three together.

So, how to encourage this different economic perspective? Perhaps a different measure of economic success?

I suspect a child poverty target may be seen as too 'social', or too 'soft', to be in government budget or economic targets. Well, here's a more hard-nosed business target for NZ to aspire to – all businesses have to be paying at least x percent above the minimum wage – we can argue over the x, it would have to be significantly above 0, but that's a detail.

And what if, after every year's announcement of an increase in the minimum wage, we are confronted not with squeals of pain and desperation from businesses, but with silence? For those that used to rely on minimum wage labour have been outcast and ostracised from our whare. They no longer exist. How would that feel? Mission accomplished.

And then we would move to the subsequent goal – to target all businesses to pay x percent above an officially estimated and mandated benchmark called the Living Wage. An aspiration that will take away businesses reliance on government largesse, and put the economic mechanism on a sustainable business model that serves people – as opposed to people serving the economy.

If we are serious about building a vibrant high wage economy, where incomes are sufficient for living and providing for families then why don't we set high wages as a measure of success? And, yes, let's have the courage to chase away low wage businesses and low wage sectors. They do not serve New Zealand well today, and will not serve us well in our future.

We need to break that low productivity, low profitability, low wage spiral and find our way out of the cul-de-sac we find ourselves in. Breaking that spiral and search for an exit requires courage and requires leadership.

In passing I note BERL's vision – 'to make a difference'.

To make a difference by helping people and their communities realise their potential. Our commitment is to the wellbeing of current and future generations. But corporate visions are great for websites. And for glossy marketing collateral. We need to walk the talk. In this light, I am proud to announce that BERL has recently been approved as an Accredited Living Wage employer.

We applied for this accreditation because

  • yes, it is closely aligned with our vision
  • and, yes, we want to walk the talk against a low wage, low productivity, low profitability model
  • and yes, it might even give us marks as a good 'corporate citizen'
  • but, primarily and most importantly, because it is the right thing to do.

I note that about the same time as we made this decision (and I must thank the other BERL shareholders for their unanimous and unwavering support for this decision) I stumbled on a recent Mood of the Boardroom survey that indicated 91% of respondents were prepared to pay the Living Wage.

I congratulate those already accredited as Living Wage employers. But, I challenge those 91% – and indeed all other businesses – what are you waiting for? Stop waiting for others to take the lead. Walk the talk and commit to a Living Wage business and a high wage economy for the future New Zealand.

No reira, tēnā koutou, tēnā koutou, kia ora koutou katoa.