New Zealand rolled back government and rebuilt economy

By Byron Schlomach, Ph.D.
Goldwater Institute
 
I recently attended a meeting with Maurice McTigue, director of the Mercatus Center at George Mason University, a former member of the New Zealand Parliament, and a man with wide experience in government reform. Attendance at the meeting, arranged by State Senator Sylvia Allen, should have been required for everyone in our state government.

Prior to comprehensive reforms 20 years ago, New Zealand was an economic mess, suffering from debt, continual deficits, and a stagnating economy. Out of desperation, New Zealand’s political leaders reduced government spending and enacted fundamental, wide-ranging reform. Since then, New Zealand’s national government has seen a single deficit; it was this year and due to the worldwide recession.

One instructive example given by Mr. McTigue concerned agriculture subsidies, which, among other things, were artificially inflating land prices. Everybody knew land prices would collapse when those subsidies ended. Some estimated 31 percent of farmers and at least seven major banks would go bankrupt. Yet, with no bailout or any other government involvement, only one-half of 1 percent of farmers went bankrupt. And not a single bank went under.

An outbreak of “spontaneous economic order,” as Mr. McTigue described it, resulted. Banks re-valued loans to avoid defaults. Farmers renegotiated payment schedules. People figured out how to navigate the changing economy without government intervention.

This example may seem most applicable to federal financial policies in response to the U.S. real estate meltdown; but, the lesson is broader. We commonly hear stories that if Arizona cuts spending on parks or education or health care, our economy will collapse. Yet New Zealand’s experience illustrates that fundamental reform, rethinking, and shrinking of government should be welcomed, not feared.

Byron Schlomach, Ph.D., is the director of the Goldwater Institute’s Center for Economic Prosperity.


Comments

  1. Let’s see, New Zealand has a public healthcare system that, based on current fears of the modest Senate bill being a government takeover, would send most conservatives into fits of apoplexy. Citizens and corporations are taxed at higher effective rates than in the US when one looks at all taxes. The government has aggressive environmental laws and the people are extremely healthy and happy. Not exactly the story Mr. Schlomach wants to tell.

  2. I wholeheartedly agree with the Goldwater Institute that it’s time to install New Zealand’s government ethos into the American system. Universal healthcare, high top tax rates, a social safety net that puts ours to shame.

  3. Byron Schlomach says

    The point of the piece was that changes were made that were predicted to have catastrophic effects once the government reduced its scope. Those predictions did not come true. That doesn’t mean New Zealand has done everything right, but the reforms do show that individuals acting autonomously in an orderly society are far more able to prosper than if government orders their lives for them. The fact that a free market system is robust enough to support some poorly organized institutions is hardly a criticism of a free market system.

  4. Then you’re looking at things in a vaccuum, because it’s not like system X won’t have an impact on system Y. That’s like saying “Pinochet’s rule in Chile helped stablized Chile’s banking system” without, you know, looking at everything else that happened in Chile at the same time.

    The top tax rate in New Zealand is 38%, the national sales tax is 12.5%, 3% higher than the US, and what, sales tax 4.5% higher than us here in AZ? Do you think that doesn’t go back to Kiwis who’ve been in danger of defaulting on loans and mortgages? As I said, New Zealand’s social safety net puts America’s to shame, and that needs to be taken into account as to what happens when the bottom drops out of an economy.

  5. Let’s see when were those farm omnibus bills passed in the US? Hmmmm, when the R’s held the majority in the congress — gotta keep those rural votes coming in. Keep preaching about reform because God knows we need it. Let the practice of the sermon begin at home…..

  6. Well, if one wants to ignore the particulars than really the only conclusion to be drawn from this article is that economic predictions can be wrong. Wow, stunning news.

    If one does look at what actually happened in NZ one finds a significant difference than the way it is being told be. In fact, there was significant government involvement in that the government run bank decided to restructure famers’ loans and write off debt and pressured private lenders to do so also. In the end, over 20% of farm sector debt was entirely written off. This would not have happened if the government run bank had not acted in that way.

  7. I was just logging in to point out a huge number of problems with Mr. Scholmach’s argument but it looks like a number of y’all already beat me to it.

    What’s in the water over at Goldwater lately? When you start implying that Chile is economic model we want to emulate, or that a singular (and wildly out of context) example from New Zealand can teach us a “broader” lesson about how we should cut deeper into education on behalf of our economy (an idea which is abhorrent to my Kiwi friends)…well, you are either tripping over your ideology on the way to the facts or you think Arizonans are a bunch of flaming idiots. Maybe both.

    PS: My Kiwi friend wants to note that on the NZ Treasurer’s page, they have this to say about education spending and the economy:

    “Education is important to New Zealand’s long-term economic and fiscal outlook, both as a major area of government expenditure, and for the significant role skills and research can play as a driver of long-term productivity growth.”

    Funny how you don’t hear that kind of talk here in AZ.

  8. The population of New Zealand is only about 4,350,000 and its economy is heavily tied to that of Australia. Australia is perhaps the only major Western country not to go into recession. And both New Zealand and Australia export huge amounts of agricultural products to China. It’s not so difficult to end farm subsidies in an environment like that.

  9. Farm subsidies cut two ways: rural votes and cheap food which buys the urban vote. End farm subsidies and you have the French food riots in our streets.

  10. ron – maybe Senator Allen invited Mr. McTigue to speak because she wants to see an end to the massive subsidies ranching gets from being allowed to graze on public land with nominal fees?

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