Thank you for the invitation to speak to you. And thank you for the work of this Committee over the past weeks. While Parliament was suspended, you have ensured that Parliamentary scrutiny continued.
In this time of extraordinary executive powers, we must uphold and defend our liberal democratic values. You and your parliamentary colleagues of all parties have done that, and New Zealanders thank you for it.
You invited me to present a vision for New Zealand’s social, political and economic future. So it is appropriate to begin with a word about our present.
New Zealand and the world are facing a crisis like none before.
This crisis is like a war in which we mourn our dead and care for the sick. It is like a recession in which many of us lose their jobs and livelihoods. It is like a natural disaster in which the world we knew is crumbling before our eyes.
I have not come here to deny the severity of our situation. It is grave.
But I have come here to offer a ray of hope.
No matter how dark our predicament, a brighter future is always possible. Because our future is always up to us.
As an economist, for me a bright future will deliver “Prosperity for all”.
You may think I am dreaming. Forecasters warn us of rising debt, bankruptcies and mass unemployment. So how can I have the audacity to imagine a future bringing “Prosperity for all”?
I was born in 1975 and raised in West Germany. So I come from a country that, in its history, has not only experienced many crises. It is a country that has brought great suffering to the world, including its own people.
And yet, despite the great disasters of two lost World Wars, I grew up in one of the most prosperous, democratic and liveable countries in the world.
From what my parents and grandparents have told me, the immediate post-War time was tough. My parents were born in 1946 and 1947. It is hard to understand how my grandparents were optimistic enough to have children in bombed-out cities, in which food was rationed, and in which life was literally in ruins.
And yet, it was also a time of hope.
A great evil, National Socialism, had been defeated. But a great promise, “Prosperity for all”, was given.
“Prosperity for all” was the catch-cry of Ludwig Erhard.
Ludwig Erhard was an economist. The allied forces gave him the seemingly thankless task of organising the post-war economy.
So how do you get an economy going again when entire industries are destroyed? How do you encourage private consumption when families are trying to make ends meet? How do you run a government when public finances are in disarray?
These are the questions that will also be on your minds as New Zealand parliamentarians today. But just imagine how much more intimidating your task would have been in Germany in 1945.
There were many people who believed back then that a government-run recovery would be the way forward.
Practically in the whole of Europe, governments took the lead in planning for their nations’ recoveries.
Not so in Germany. Because Germany had a group of economists around Ludwig Erhard.
Erhard knew that Germany would only recover if the recovery grew from the bottom up. It could not be planned for by the government. And Erhard knew that it would only be a recovery deserving its name if it brought “Prosperity for all”.
“Prosperity for all” was more than a slogan. It was more than the title of Erhard’s famous book. It was the essence of Erhard’s policies.
Economic policy is not about propping up some big companies. It is not about preserving the privileges of the few. It is not about the government picking winners and controlling the economy.
No, the ultimate goal of economic policy is to bring hope and prosperity to all people.
Ludwig Erhard achieved this. Under his leadership as economics minister and later as Chancellor, the country experienced a boom like never before. It was a true economic miracle.
Germany caught up with and then overtook Britain’s GDP per capita. It had full employment and became one of the world’s strongest export nations.
So, you may now wonder what was Erhard’s miracle recipe? What did he do to turn the ruins of an economy into an economic powerhouse? And what can we, in New Zealand, learn from this?
The truth is: there was no miracle formula. Erhard did not micro-manage the economy. He did not control individual industries. He did not print money to finance his projects. Nor did he pay favours to any businesses.
Erhard followed a principles-based approach, which he called the “Social Market Economy”. And that is the approach I recommend to New Zealand today.
Erhard’s friend and economist colleague Walter Eucken distilled seven principles of the “Social Market Economy”:
- A functioning price system
- Monetary stability
- Open markets
- Secure private property rights
- Freedom of contract
- Liability for one’s actions and commitments
- Steadiness of economic policy
Each of these seven principles is as relevant to us today as it was in 1945. If we follow these principles, we can build New Zealand’s recovery and bring prosperity to all New Zealanders.
On many of these principles, New Zealand has done well in the past. But in the face of this crisis, we must do even better now.
As Ernest Rutherford said, “We haven’t got the money, so we’ll have to think”.
Let me illustrate what I mean. We have just had our tourism industry thrown into disarray by Covid-19. It will not return in its previous size for many years.
This means the worst we could do now is to pretend we could preserve tourism as it once was. Instead, we should allow the factors of production – capital, labour and land – to rearrange. That needs property rights and freedom of contract.
We will also need to strengthen property rights and freedom of contract for infrastructure projects and housebuilding. That means simplifying our planning procedures. We cannot afford bureaucratic delays in our economic rebuild.
Take another example: Open markets. New Zealand has a proud tradition of being a free-trading nation. Our crisis must not change this. We should see trade and investment as an opportunity to grow out of this crisis.
While other countries are still struggling, our status as a potentially Covid-free haven will help us. Our food exports could reap a Covid-free premium. Our education exports could do as well.
We must allow this to happen. Which is why we should re-open our borders to international students quickly and allow them to attend our universities after a mandatory 2-week quarantine.
In a similar way, we need to be even more open in our dealings with the world. We will need heaps of capital to rebuild our economy, and so we should suspend the clumsy rules on foreign direct investment. We should send a signal to the world that we welcome investment and investors.
Finally, I want to stress the importance of monetary stability and steadiness of economic policy.
We have all heard that central banks are to create unimaginable sums of money. But that can easily deliver the opposite of monetary stability. Especially in a crisis, the public must know it can trust the independence of the Reserve Bank and its commitment to long-term price stability.
There is a political temptation to use this crisis for political pet projects, especially if funding for them comes from the Reserve Bank. Yet, that would be a grave mistake.
It would also be a big mistake to spend money on projects just because they are ‘shovel-ready’. What distinguishes a good project from a bad one is that a good project’s benefits are greater than its costs.
New Zealanders must be able to trust in the steadiness of economic policy. Ludwig Erhard once said that 50 percent of economics is psychology. We therefore need a government that is predictable and steady. The last things we need are policy uncertainty, political surprises and monetary experiments.
What we do need is a recovery based on sound economic principles.
This was the strategy that propelled Germany’s economic miracle. But it is also an approach proven right in many other crises since.
In 2016, Danish economist Christian Bjørnskov analysed 212 crises in 175 countries over the period from 1993 to 2010. His findings, published in the European Journal of Political Economy, vindicate Ludwig Erhard’s earlier insight: Countries with better economic institutions experienced more moderate crises than others. And they also recovered faster.
We should take heart from this study, and we should hold on to those timeless principles of good economic policy I described earlier.
Nobody knows what exactly our future will look like. But we do know that an economic framework with secure property rights, sound money, competition, freedom of contract, open markets and a functioning price system will give us the flexibility we need to weather the storms and grow out of this crisis.
This is the best path towards a bright future for New Zealand, a future that will deliver prosperity for all.