5 Minutes Reading Time

• Productivity among rich countries has slowed since the mid-1970s
• Nothing tried since then, like privatisations and lower taxes, nor advances in technology, has moved the needle. Inequality has worsened.
• Nobel Prize-winning economists Banerjee and Duflo argue we are better off working to improve the lives of the average citizen

Economic growth (GDP per capita) in rich countries, including New Zealand, came to a halt in the early 1970s and has been anaemic since then. Nothing tried since then – reducing taxes, deregulation, privatisation, globalisation, etc, has moved the needle. Nor have computers, the internet or automation.

The rich world experienced one of its highest periods of economic growth, the “Thirty Glorious Years”, from 1945 to 1973, due to many factors. The Post-War construction boom and low-cost energy. Home appliances that eased the entry of significant numbers of women into the paid workforce. The middle class expanded exponentially. Industries sprang up to cater to the middle class, including the automobile industry, suburban housing, tourism, and hospitality. High tax rates for the wealthy didn’t hobble economic growth.

The oil price shock ended the rich world’s economic boom. New Zealand’s economy was upended even more. The decline of wool exports due to synthetics like nylon being used for carpet manufacturing. The loss of our primary export market due to the UK’s entry into the European Common Market. The Think Big programs failed. We lived beyond our means for way too long, culminating in the massive economic crash of the 1980s.

The dramatic oil price increase led by the cartel of oil-producing countries (OPEC) in 1973 led to high inflation and a slowdown of economies. The standard economic prescriptions for recessions no longer worked. What followed was neo-liberalism. Lower taxes on the wealthy and corporations, GST, privatisation of state assets, sell-off of state-owned assets and state housing.

Economies recovered after high interest rates imposed to kill inflation were reduced. However, productivity growth in the rich countries was significantly slower than pre-1973 levels, and inequality and poverty levels increased. Dramatic advances in computerisation and the internet failed to move the needle for rich countries. Annual economic growth (per person) of 2.5% per year between 1945 to 1973, dropped to 1.5% (NZ was 1.4%).

In contrast, the economies of some developing countries, particularly China and those in Southeast Asia, grew exponentially as manufacturing shifted to these regions and replaced low-productive subsistence farming in these countries. In rich countries, high-paying manufacturing jobs were replaced by low-paying and insecure service industry jobs.

There was little done for regions whose economies were decimated when their factories relocated overseas. Poverty, crime levels and drug use increased dramatically in towns affected. It was particularly traumatic in the USA, which had a poor social welfare system. Nobel Prize winning Economist Banerjee was blunt in his assessment, instead of boosting benefits and retraining workers who lost their jobs, “we should have helped them adapt, instead we sold them opioids”.  

Lowering taxes does not increase economic growth. A study by Political Economists from King’s College London found that tax cuts over the past 50 years had no impact on economic growth or unemployment; only deepened inequality and reduced the taxes collected. A similar observation was made in a University of Chicago (a bastion of right-wing economists) study of the effect of tax cuts across the 50 states.

Nobel Prize-winning economists and hundreds of economic studies over the past fifty years have not figured out how to increase the productivity of the developed world. We need to cut some slack for New Zealand’s leaders; nobody else has figured out a formula to return to high growth. Will we find one in the future? Maybe.

The ageing population will negatively impact productivity, and this could be the same with climate change, especially if we muddle through like most countries. Hopes are now pinned on artificial intelligence but its impact and how it will affect different workers and sectors are uncertain. It is likely to make some firms more efficient. IT firms are already laying off thousands of workers. A leading IT company in New Zealand, Datacom, just reported higher profits with a reduced workforce. Weta Workshop is planning to lay off a hundred workers.

A company can lay off workers and be more efficient, but a country has to make the entire workforce more productive. Can displaced workers move into higher-productive and higher-paid work? A recent report by Microsoft found New Zealand lags behind in AI readiness and redeployment plans compared to similar-sized countries. We are also lagging in AI regulation; the Minister for Technology, Judith Collins, says there are no plans.

Nobel Prize-winning economists Banerjee and Duflo argue that the obsession with growth is counterproductive. We are better off improving the lives of the average citizen while we are searching for the holy grail of increasing productivity growth. There are many ways to improve the lives of the squeezed middle class, for example, by shifting the tax burden from the average citizen to the wealthy and by lifting the minimum wage to a living wage.

We can have a happier, kinder country with the resources we have.