We may regret we have not put enough effort into building resilience.
I was wrong when I argued that the Muldoon Government should have hiked petrol tax to ration petrol when it ran short following the Second Oil Shock in 1979. The Iran revolution’s reduction of oil output amounted to about 4 percent of world production; New Zealand was heavier hit when an oil tanker heading for our shores was diverted to Japan. The government considered full rationing but restricted cars from travelling on particular days instead – the so-called ‘carless-days’ scheme.
At the time, it seemed to me that it made more sense to allocate the scarce petrol resource by raising its price via a tax surcharge. However, the demand for petrol is very inelastic (unresponsive to price changes) in the short run; people are stuck with their cars and patterns of travel and cannot easily alter them. To reduce consumption sufficiently would have required a massive tax hike. (It was indicative of economic thinking at the time that ministers did not even contemplate this market price option.) It is estimated that carless days saved a day’s petrol every month – not much. The tax increase required to get this effect in the short term would raise the petrol price to around $4.80 a litre in current terms – ouch. *
The Iran war is expected to cut growth, raise prices and cut real incomes. By how much it is too early to tell. The government’s approach has been ‘don’t panic’. Perhaps the government is too calm. (No doubt its advisers are working their butts off.) I just hope the crisis is over by the end of May and we do not have to look back at the missed opportunities to conserve transport fuel.
Even its package for working families seems ad hoc. I have no objection to increasing support to children, although almost everybody agrees (they did virtually from day 1) that Working For Families is a clumsy and inefficient way to do this. There is substantial variation of fuel consumption by families. It looks more like a budget measure hastily brought forward more than anything actually addressing the fuel crisis since Meanwhile, the government keeps promising to do something for those who consume a lot of fuel (such as when there is a considerable distance between home and work). We shall see.
As 1979 teaches us, there are actually two issues. One is supply shortage and the other is an international price hike which is an income effect. Economics tends to conflate them because they are interdependent in the long run, but in the short medium term it is useful to separate them.
Miraculously there has been some forward thinking about the issues. Some three years ago the previous (Labour) government had a group of government agencies, led by the Ministry of Foreign Affairs and Trade, reviewing ‘supply chain resilience, including the identification of essential goods (and services) that New Zealand needs to be able to access, and policy options for dealing with six-month to one-year scenarios.’ The outcome of the review is reported here.
The government also asked the Productivity Commission to look at the longer term aspects of resilience. It reported just as it was being (regrettably) closed down. Not only was a team with expertise broken up, but there was more work that followed from it.
The funding of the closed Commission was diverted to the Ministry of Regulation – the highest-paid of all New Zealand’s bureaucracies. Presumably the government had greater priorities than productivity growth or economic resilience. The reduced regulation on hairdressing may comfort you when you get your next haircut (baldies miss out) even if you could not drive to get it.
The Productivity Commission defined the notion of resilience as ‘the capacity of industries and associated communities to anticipate, prepare, absorb, recover, and learn from supply chain disruptions’, observing that ‘global trends point to a more volatile and uncertain future’ and that ‘New Zealand should expect more frequent disruptions in the near future’.
It studied supply-chain disruptions with a Computable General Equilibrium Model with scenarios which found shocks reducing Gross Domestic Product by between 1.4 and 7.5 percent. (Current estimates of long-term productivity growth means the economy would be set back by between two and ten years in per capita terms.) Between 24,000 and 112,000 workers could lose their jobs.
Since the exact source, timing and magnitude of disruptions cannot be predicted, it is crucial to invest in generic sources of economic resilience. The commission’s policy recommendations were at a high level requiring more detailed work, which I doubt has been done.
One generic source of resilience is the government’s ability to borrow offshore (directly or indirectly, as when foreign investors buy government domestic bonds). That is why Treasury is keen to keep our government debt low. (In my opinion, the level could be higher, providing any additional borrowing was invested including to increase resilience.)
Energy policy is almost generic. It is disappointing that we have not done more to reduce New Zealand’s dependence on imported energy by accelerating renewable energy production and purchasing more electric vehicles. (Some would say that finding hydrocarbons would also contribute to resilience although there are complications.) In the longer run, we strengthen public transport by housing people closer to it and by greater electrification of railways.
As the Productivity Commission report indicates, there are other measures. But the point is made. We have given little priority to building resilience to the many threats that New Zealand faces. We may regret this failure in the next few months. (More generally, I have on my to-write list an account of how concerns about resilience seem to be reshaping globalisation. This column is about local domestic resilience.)
Better resilience to supply shocks doesn’t deal with external price shocks, such as the rise in the price of oil which we are currently facing, or the international inflation which challenged us a few years back. As the second example reminds us, we leave the policy response to inflationary pressures to the Reserve Bank. Economists are still arguing how well it managed its response then. That is another issue to be left to a future column.
Short-term crises usually defer long-term thinking. As we face one shock after another, we are too frequently unprepared for the next.
* Those who did ECON101 microeconomics will recognise that the ‘income’ effect of a price hike is, in this case, far greater than the ‘substitution’ effect.