New Approaches to Economic Challenges: Confronting Planetary Emergencies: OECD 9 October 2020Trade and Export Growth
Hon David Parker’s response following Thomas Piketty and Esther Duflo.
Good morning, good afternoon, and good evening, wherever in the world you might be. I first acknowledge the excellent thought provoking speeches of Thomas Piketty and Esther Duflo, and thank the OECD secretariat for the opportunity to respond today to two such thoughtful and influential thinkers.
A few years ago, I spent a very pleasant summer holiday reading Capital in the 21st Century, thoroughly. I claim to be a Picketty 1%er, not because of my all-too-modest wealth, but because I read all the footnotes.
I am a disciple, and accept that over recent decades - and on current trends into the future – both western and eastern forms of capitalism are causing ever increasing wealth inequality, with more and more of that wealth being inherited by accident of birth rather than earned.
COVID-19 has required all parts of society to cooperate in social distancing, testing, track and tracing.
It has required leadership from governments, not just in health but via income supports, and economic stimulus to help sustain and rebuild economic activity.
COVID has shown us that social cohesion, trust and cooperation are essential ingredients to overcoming complex challenges.
My Prime Minister would say kindness underpins them all.
Rampant inequality is unkind and undermines our efforts to address complex problems.
Accelerating climate change, rising inequality, and technological disruptions, were all formidable challenges own before COVID. They interact, amplifying bad outcomes.
COVID-19 adds to these challenges but also provides an opportunity within countries and multilaterally to address them.
The seriousness of the economic effects of the current crisis are being compared to the state of the world after the great depression and World War Two.
Looking back, it is easy to make the mistake of seeing the post war Keynesian accommodation between capital and labour, the fundamental changes to monetary policy at Bretton Woods, the Marshall plan, the new institutions like the OECD, the 1948 General agreement on trade and tarrifs (which preceded the WTO), and the United Nations as some grand plan that was preordained.
It was not like that. After years of poor international cooperation and war, our predecessors worked it out as they went.
They too lived in a time when people had made sacrifices for each other, and understood the need to cooperate nationally and internationally to help everyone, including themselves.
Perhaps we are at another point in history, where good leaders will lead well. I hope so because global cooperation is needed to overcome the many challenges that face our world.
This is not to deny the importance and power of the single state responses. Awaiting multilateral solutions is currently more often than not a barren exercise. It can also be an excuse for inaction at home.
We know that action within countries matters. Inequality has been rising within and across most countries but at different speeds, proving that institutions and policies matter and can moderate or exacerbate inequality. The different progress countries have made on controlling climate changing emissions illustrates the same point.
So I will describe some of New Zealand’s national response before returning to suggestions where I believe multilateral efforts should focus.
The New Zealand Government’s response to COVID has been to cushion the blow and to maintain the social contract needed to overcome the virus.
We had an early and very strict lockdown. Our wage subsidy scheme was aimed at keeping workers attached to their workplaces. It was a simple scheme and we got the money out very quickly. At its peak, two thirds of the labour force was supported by the subsidy.
It worked and people remained connected with their employment even during lockdown. Unemployment has risen less than was predicted.
For those who did lose their jobs, a new COVID-19 relief payment provides support while they search for work. And we have boosted funding to training and education to help individuals to retrain and upskill themselves.
We have provided significant fiscal stimulus, with a strong focus on improving infrastructure, to kick start the recovery.
In many ways our response has been an extension of our efforts as a government.
When our new government took office in late 2017 we faced a set of complex problems, including: child poverty; housing unaffordability; climate change, deteriorating water quality.
The digital transformation, while holding great potential, also threatened to change the future of work in ways that exacerbate inequality.
We have broadened the definition of progress beyond GDP and developed new and more comprehensive measures of success.
Led by Prime Minister Jacinda Ardern, who has publicly declared that policies will be grounded in kindness and compassion, our Government introduced the country’s first Wellbeing Budget in May 2019.
It had a strong focus on intergenerational well-being, which resulted in the weighting of government programmes towards income sufficiency for children, housing, mental health, climate change and fresh water.
We have also taken local steps to push against the worst excesses of global capitalism, by introducing a ban on foreign buyers of existing homes. This has ensured the market in real estate is set on the domestic market, not by 1 percenters living overseas.
The Government has implemented a number of programmes to ameliorate income inequality in New Zealand:
- We increased the minimum wage, which was already high relative to median wages in New Zealand compared to other OECD countries.
- We funded a Families Package weighted towards low income families.
- We indexed benefits to average wage increases rather than inflation.
- We invested in state-funded health and education infrastructure and services.
The OECD in its most recent Economic Update recommended that governments invest now in helping people keep or find new jobs, and in the environment. We are following that advice. The COVID-19 recovery is a unique chance to address climate change. If countries do not integrate climate change into recovery stimulus now, they lock themselves into a high emissions pathway. That would increase the burden on future generations, who will bear the environmental debt as well as the financial debt we are incurring now. Our post COVID Budget included a significant Jobs for Nature programme. It will provide jobs over four years, bringing improvements to freshwater, biosecurity, and biodiversity. New Zealand is pushing faster towards 100% renewable electricity by 2030, having already achieved 82% through sustained effort and good policy. We will be investing in a network of hydrogen refuelling stations for the heavy transport fleet – again creating jobs and supporting the green hydrogen vision that capitalises on New Zealand’s renewable energy. Returning to multilateral themes, if we compare current challenges with the post war period we see many similarities, plus a newer suite of environmental issues ranging from climate change to fresh water quality, plastic waste and over fishing.
First the similarities.
Both times were dealing with the effects of globalisation. Not much difference there.
Monetary policy was in a state of flux in the 1930s and 40s. This is another similarity with now, given that pre COVID quantitative easing had already collapsed global interest rates to close to zero, and pumped up the asset prices of those who hold and leverage them.
The world went into the COVID recession without the ability to use the central monetary tool of substantially lower interest rates to stimulate activity.
After the GFC New Zealand resisted QE, but this year in the face of COVID - with imported interest rates already at historic lows - our central bank joined the QE party.
So house prices are increasing again despite the Covid crisis and the impact of the lock down on employment and growth.
This is not new. Since the GFC the wealthy have been able to leverage their investments at very low interest rates. This has been to the relative detriment of the young, and those without assets.
There is a problem with this status quo around the world and we need a conversation about what the remedy might be.
Income inequality was another problem then and now.
Figures from the APEC grouping of 21 Pacific Rim economies also show that the share of GDP going to labour has steadily declined since the 1990s.
The impact of COVID-19 in New Zealand on incomes has, as elsewhere, fallen disproportionately. Workers in the hardest hit sectors of the economy - tourism and hospitality - tend to be lower paid, part-time, female, and younger.
Internationally, the labour share of GDP will continue to drop if we replicate the approach we took to the GFC in response to the COVID-19 pandemic.
Current wealth inequality shows the compound effects of income inequality. In 2018 in New Zealand the top 10 per cent of households held over half (53%) of household wealth, and the top 1 per cent held 16 per cent of wealth (Stats NZ).
But as Piketty has identified, these official measures of wealth inequality at the top are imperfect. They poorly sample the super-wealthy. They don’t capture all the investment vehicles and trusts that they use. Assets are sometimes reported at historic cost rather than current values.
This bias towards under-reporting wealth at the top means that wealth inequality is worse than reported.
This is another similarity with the past.
The problem of wealth inequality was fresh in the minds of our predecessors in the 1940s, who had suffered the extremes of the 1920s and 30s and the war which followed.
Back then trade was seen as a force for good, and should be seen that way now. We currently risk a descent into trade wars and barriers that will harm us all.
While New Zealand has long advocated internationally for open trade, by 2017 we too were seeing increasing public scepticism at home.
Our response, borrowing the language already used by the EU, was our Trade for All agenda.
It aims to ensure the benefits of trade flow – and are seen to flow – to all sectors including small and medium businesses, indigenous Maori, women and the regions.
It has increased the social licence in favour of trade by showing its positive contribution to the issues people care about: jobs, communities and the environment.
A good example is using trade policy to address environmentally harmful subsidies – including for fisheries and for fossil fuel production and consumption.
They are costly and often socially regressive and make climate change worse. Fossil fuel subsidies cost US$582bn in 2019. Those public funds could be used for recovery efforts.
New Zealand is negotiating a plurilateral Agreement on Climate Change, Trade and Sustainability, with legally enforceable disciplines for fossil fuel subsidies.
Taxing Multinationals in the Digital Economy
Another priority for the Government has been making sure that multinationals pay their fair share of tax.
Countries have taken some good steps to counter tax avoidance by multinationals. We have implemented the key Base Erosion and Profit Shifting measures.
While the BEPS project shut down some artificial tax avoidance strategies, digital multinationals can still avoid paying a fair amount of tax. This is mostly due to flaws in the current international income tax framework.
An OECD led international solution is preferred by the New Zealand government over a Digital Services Tax (DST).
However, the Government will seriously consider a DST if the OECD is unable to reach a solution.
So, I would say we the politicians in this room should encourage the OECD and other multilateral to address:
- Income inequality
- Wealth inequality
- Monetary policy
- The benefits of trade
- Fair international taxation for digital services
- Environmental issues, including practical measures to reform fish subsidies and fossil fuel subsidies
- And lastly, what duties should be owed by social media companies who are carrying messages of hate and misinformation, and undermining trust in liberal democracies.
We should seize the opportunities thrust upon us by COVID, and if we do we will all be better off.