Brian Easton casts an eye over the general calls for higher economic growth. He wants to see more focus on addressing economic bottlenecks, but can't find evidence less regulation delivers higher growth

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

There is a constant theme from the economic commentariat that New Zealand needs to lift its economic growth rate, coupled with policies which they are certain will attain that objective. Their prescriptions are usually characterised by two features. First, they tend to be in their advocate’s self-interest. Second, they are unbacked by any systematic empirical evidence using, instead selective anecdote. Well, yes; there is always an example to confirm one’s prejudice. But rarely will it stand up in a court of science. (The conversation is not helped by those who cannot discriminate between productivity growth is slowing down and productivity is falling.)

My research on economic growth has been driven by curiosity rather than seeking policy conclusions. It goes back to almost the beginning of modern growth economics in 1960 when we began having the data and the theories it generated.

I may have done more research on the topic than any other New Zealand economist. For instance, I can explain why in some periods the economy has grown more slowly than other affluent economies. The explanations are prosaic and do not depend on an ideology. The salutary conclusion is that there was not much we could have done to change the underlying growth rate. (That is not true for other measures; for instance, sometimes we could have avoided high rates of inflation – but with different costs from those that inflation imposed.)

That does not mean that we can do nothing about the economic growth rate. It needs actions to maintain it; some of those actions are in our powers. I remember a 1965 seminar – it was discussing then fashionable planning – at which someone said the concern was unblocking bottlenecks. A lifetime of research has demonstrated the wisdom of this observation. The best explanation I can give for economic growth (aside from moving resources from the non-market to the market) is the introduction of new technologies – blueprints on how to do things. They often require changes to policy.

For instance, Telecom could not work out how to create a broadband network. The government had to intervene to enable the rollout, breaking the bottleneck with a new telecommunications configuration based on Chorus. The strange thing is that while a comprehensive broadband network is a good thing for the economy and society (and has had dramatic impacts on our lives), I have seen no evidence that it has increased the economic growth rate. Perhaps if the rollout had not happened, the growth rate would have stalled, although I am not sure how to verify the proposition scientifically.

One of the strangest results from the research is that within measurement error the underlying long-run economic growth rate has been broadly constant since the 1860s – as far back as we can go. I am stuck with an explanation that the impact of those technological blueprints over the last two centuries has been broadly uniform. (I am not entirely comfortable with the explanation; any empirically based alternative explanations would be welcome.)

Bottleneck-busting best explains the New Zealand Productivity Commission (NZPC). The rhetoric was that its purpose was to increase the economic growth rate. There is not a skerrick of evidence that it has.

But the NZPC may not have been a failure. Rather, it has been reviewing growth bottlenecks. There are diverging views about how successful it has been. Some are ideological. Under the National Government the NZPC had a bias towards a neoliberal account of how the economy worked. Their friends commended their work, although in some cases the bias meant the NZPC did not chase up what I thought would have been fruitful lines of enquiry. When the Labour Government eventually appointed Commissioners who were more attuned to it’s view, the neoliberals began to vigorously criticise the NZPC. That’s politics.

Much of the work of both phases had little impact on the public debate. (However, policy analysts in the public sector have told me they found particular reports invaluable.) I particularly draw attention to Business by Numbers, published in February 2024, which usefully brings together a lot of information from various Business Operation Surveys. The report concludes it has only scratched the surface of what is available; there is a lot more work to be done before we can fully exploit the potential that the surveys offer.

Alas, the work won’t be done by the NZPC (or, probably, anyone else). The incoming Government has closed it down. When the NZPC was established, the National Minister of Finance, Bill English, said the intention was that it would be non-political and survive change of governments. It was in that spirit that the following Labour Minister of Finance, Grant Robertson, left the NZPC largely untouched until new appointments were necessary; so that for his first term the NZPC continued to operate as it had, with its neoliberal bias.

Despite the NZPC being a 2010 ACT initiative, it was the ACT party which abruptly abolished it in February 2024 in an exercise of taking no prisoners. (One is reminded of neoliberals in the 1987-1993 period; if it continues, the current Government may be reminded in the 2026 election of the collapse of support experienced by its predecessors.)

The funds saved from the abolition of the NZPC are being diverted to the newly established Ministry of Regulation. (It will be three times as large as the NZPC – here is one area the government is not cutting back.) Because it is a ministry – its minister is ACT party leader David Seymour – it will have less independence than the NZPC.

There is a view that what is stalling economic growth is over-regulation; abolish it and the economy will boom. It is hard to find empirical evidence to support the view. The last big attack on regulation was in the 1986-1993 period. It is difficult to show it enhanced the growth rate. Once the economy got through the stagnation from macroeconomic mismanagement, it returned to chugging along at the historical growth rate.

Because I wanted to believe that market liberalisation would benefit the economy, I put a lot of research into assessing the hypothesis. I concluded that the liberalisation seems to have led to a better quality of output, more variety and more resilience, none of which are measured well in conventional economic growth statistics. It was also more beneficial to the rich than the poor. But, blow me down, I could not find any acceleration of the underlying growth rate.

There is a counter-example. New Zealand’s fastest economic growth in the last century was in the late 1930s and the early 1940s under the First Labour Government, even when we have allowed for the recovery from the Great Depression. It was also a period of a substantially increasing state regulation of the market. I do not think the additional interventions explain the growth boom, but the episode suggests they did not retard it either.

There is a case for more pragmatic attention to regulate better. Two examples I have looked at illustrate the need. The Leaky Buildings Disaster was a case of under-regulation which cost the country millions of dollars to replace badly built homes and other buildings, while stressing many homeowners. The 2016 Building (Earthquake-prone Buildings) Amendment Bill is a case of over-regulation which is costing the country millions of dollars to unnecessarily modify homes and other buildings, while also stressing many homeowners.

Business by Numbers devotes a chapter to business views on regulation. It found grumbling rather than griping. (The largest concern is workplace safety rules.)

There is certainly a case for better regulation of markets. It would be great if the Ministry of Regulation meets the challenge, although it won’t unless it approaches each case pragmatically. I doubt that it will have much impact on the economic growth rate but, done well, it will improve the quality of life of New Zealanders.

PS. I am puzzled why the Minister of Regulation is not one of the ministers to make the final determination on Fast Track Approval. The current proposal involves the Ministers for Infrastructure, for Regional Development and for Transport (sometimes the Minister for Conservation will be involved). It almost suggests that the government is running two separate economic development policies.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.