In a far-reaching speech this week that went way beyond the confines of official cash rates and inflation adjustment, Reserve Bank governor Adrian Orr laid out possibilities for a new and fairer global economy.
It was remarkable, not least because he was talking to the Financial Services Council and Workplace Savings NZ’s conference. It’s a mesmerising read for those of us who voted for change a year ago, in that it signals a sea-change in what is politically acceptable and what politicians can recommend without being considered too extreme to gain or keep public office*.
The key plague on economic society as ‘short-termism’, said the governor in his first public speech in New Zealand’s key banking role. “This is the overt focus on the next day, week, or reporting cycle. In contrast, by long-term, I mean anything that ranges from ‘outcomes’ over the next few years, through to an ‘idealised vision’ that could last inter-generationally.
“The long-term issues are critical to our task of maintaining low and stable consumer price inflation, promoting a sound and dynamic financial system, and meeting the currency needs of the public,” he said.
“A short-term focus can be driven by the need to survive from day-to-day.
“However, it is too often driven by the desire to consume at an unsustainable rate. “The desire for instant gratification or reward can often leave behind a trail of unintended consequences. Some of these consequences may impact on us personally, but we too often assume we won’t be the one affected.
“We strive in business every day to achieve economic growth – or economic security and wealth. We aspire to use this wealth in a pleasant, sustainable, natural environment that we can call home. We also aspire to live and bring our families up in a safe place, of social cohesion, being accepted and appreciated. And, we want to live in a place where everyone can participate despite our differences, a ‘diversification dividend’ not cost.
“Wow, what a cool place that would be. Where do I buy the ticket? A virtuous, wealthy, and rich society?
However, he said, “Our financial systems are struggling globally to identify, price, and allocate risk.
“Too often, due to short-termism, we view economic growth as something that comes at the expense of a sustainable environment, or social cohesion and cultural acceptance.”
The financial system works best when all relevant risks are adequately identified, priced, and allocated to those who can best manage them, he said.
“The problem is that focusing on the short-term means that many risks are neither identified or priced, and often allocated to those who are least aware of them and unable to manage them.”
So while social cohesion, national boundaries and beliefs are threatened by comprehensive change, the economic ‘pie’ – having grown in total – sees the rewards going to the owners of capital (profits) outstripping the owners of labour (wages) more than throughout economic history.
‘Superstar companies’ and big banks can see‘winner takes all (or most)’ of an entire industry, their superior economies of scale driven by technology and brand advantages that are not easily replicable.
Underlying global challenges also include urbanisation, mass migration and climate change that means people must leave and find new homes, “witness the Sahara-African peoples virtually swimming to Europe,” he said.
New Zealand is not immune to these issues locally but we do have opportunities to lead the globe in positive change if we can become more long-term in our economic activity, he said, quoting a paper prepared by the Productivity Commission which describes a ‘capital-shallowness’ of much of our economic activity including our low savings rates that mean workers don’t tend to draw advantage from profits.
“Likewise, many of our larger companies are driven to pay dividends (often offshore due to their ownership) rather than re-invest in their own company, or New Zealand more broadly.”
However, the governor said, the world often looks to places like New Zealand for leadership (or at least hope and safety). “Hence, we rely heavily on our reputation and management of the long-term issues such as climate change, social cohesion, and inclusion of all.
“The great news is we are small, young nation, lightly populated, green, kaitiaki (caretaking) of spirit, not dependent on the export of fossil fuels, and have a strong rule of law and sound moral compass. Significant and bold leadership is in our grasp,” he concluded.
• Liz Waters